I know I bang on about it a bit, but I wonder if people truly understand what a unique period in history this is.
To be alive at the same time as Justin Beiber…
No that’s not what I’m talking about. And I’m not talking about the internet revolution or an approaching environmental tipping point either – though both of those things make it a fascinating time to be alive.
I’m talking about being here to witness the greatest global financial experiment…
And if you play your cards right, make a tonne of cash out of it.
Because that experiment involves the digital equivalent of dropping money from aeroplanes.
Great big bags of it.
Money has never been this easy. Never.
We’ve never seen anything like it. And the whole world’s gone wild with EZ fever.
At the beginning of the month, the RBA cut rates, taking them to the lowest level in 50 years. And if you ask me (and most economists… and taxi drivers and hair-dressers) they could go even lower yet.
But money in Australia, even at 50 year lows, is relatively expensive compared to what’s going on in the rest of the world.
All of the G7 now have interest rates set at less than one percent. They’re zero in the US and Japan. Super Mario Draghi’s even talking about taking rates into negative territory in Europe.
Yep. EZ fever is spreading. In the last month or so, there have been interest rate cuts in the eurozone, India, Australia, South Korea, Kenya, Poland, Mongolia, Belarus, Austria, Belgium, Hungary, and Turkey, just to name a few.
Even the thriving financial centre of Botswana got in on the action. Not to be outdone, the governor of the central bank of Moldova told the newspaper boy to get back on his donkey and tell everyone that they were cutting rates too.
It’s unprecedented. The world as never seen money as easy as this.
And what does it mean?
Well, in the long run, it’s not quite clear. It’s a pretty radical experiment. The equivalent of stitching various body parts together and sparking the whole thing off with lightning. You could end up with something that’s very handy around the house, or you could end up with a monster that likes to destroy entire villages.
But that’s in the long run.
In the short run, it’s going to jack up asset prices. Why? Because that’s exactly what it’s supposed to do.
Sure, the pointy-heads might tell you it’s about lowering the cost of money, and making it cheaper for consumers to consume and businesses to invest. And that might happen, but it seems that’s a little way down the track.
But the first step is to flood the world with cheap money, knowing full well that a vast share of it will get pumped straight back into shares and property. Hopefully, once soaring asset prices make people feel rich, they’ll start spending again.
Glenn ‘Good Times’ Stevens and his league don’t really care how we get there. Just as long as we get some more fuel in the tank, and we get the economy going again.
It’d be great if consumers just started loading up on debt again, and started ramping up consumption that way.
But since they don’t want to play ball, we’ll need to make them so rich they feel obligated to buy a Mercedes.
Likewise, it’d be great if businesses started leveraging themselves up to the eyeballs again. But since they’re not, let’s jack up the paper value of their companies, so they’re just begging for something to invest in.
The ends justify the means.
If it sounds like a dangerous game then that’s because it is. The Central banks are gambling that they can get the economy going again, before all this money flooding into asset markets unleashes bubbles the size of wrecking balls. If they can’t pull it off, then look out.
Pity the poor villagers.
But so far, and it’s still early days yet, it seems to be working. The stock market rally in the US is keying entirely off Big Ben Bernanke’s quantitative easing regime.
So much so that a few weeks ago, rumours that the Fed might be about to start taking it’s foot off the pedal, and unwinding some of it’s 85-billion worth of QE, sent a mini panic through the stock market.
Last week thought the Fed came out and said, ‘No, just kidding. Here’s some more money.’
And the jubilant villagers sent stocks soaring.
It’s the same story in Japan. Since Shinzo ‘Abenomics’ Abe announced that Japan would be copycatting the Fed, the stock market’s jumped 60 percent!
The Nikkei 225 is now a full 75 percent higher than it was in the middle of last year.
Which, by the way is great news for Australia. We’re so focussed on China these days, but Japan is still our number 2 trading partner. News that they could finally be breaking out of the swamp is a big plus for us.
A lot of this jump in Japan is on the anticipation of a flood of money, not so much on the money itself, but the EZ money doctrine is in full effect.
- Make money EZ.
- Make people rich
- Hope your rich people start spending
It’s radical! It’s kooky! It’s crazy! It’s never-been-seen-before prices!
And it just might work.
What you’ve got to ask yourself is: are you going to let them make you rich?